Investment advice

We raised the rating of China Travel Service in Hong Kong from neutral to recommended, and raised the target price from HK$2.64 to HK$3.88. The reasons are as follows:

New CEO, new strategy: Since the new CEO took office in 2016, the company has proposed a number of new business goals, including ROE targets, core profit growth, and management incentive plans. We believe the new measures can better motivate executives and further promote the company's development.

It is expected that the potential value of property assets in Hong Kong will be realized. We estimate the potential value of property assets held by the company to be close to HK$15 billion. The company may dispose of a commercial building located in Mongkok. We expect the company to pay a special cash dividend after the sale of property assets.

We expect the company's core profit to increase. The increase is mainly due to the recovery of the Hong Kong and Macau hotel business from a low base, the increase in the growth rate of domestic tourism projects, the development of new tourist real estate projects in the tourist areas of Zhuhai and Anji, and cost control measures.

What's the biggest difference between us and the market? We believe that incentives for management will promote increased profit growth.

Potential catalyst: The company announced the sale of assets.

Profit forecasting and valuation

Taking into account the company's new strategy and development, core profit forecasts for 2017 and 2018 were raised by 46.6% and 57.6%, respectively, to HK$764 million and HK$907 million. Based on the segmented plus total valuation method, the target price was raised 47% to HK$3.88.

risks

The reform process of state-owned enterprises has been slower than expected.